Here’s some recent news about the real estate markets in China. I think it is fascinating watching how these things unfold. This proves once again that the lesson of history is that we don’t learn the lessons of history.
I predicted over 2 years ago that the Chinese stock markets would implode dramatically, much to everybody’s disbelief and skepticism. It began a few months sooner than I thought, but, that is exactly what has happened. Now for the last year or so, I have predicted that things will get VERY bad in the Chinese real estate markets over the next several years. Again, most people I have talked to about this (especially Chinese) have almost universally dismissed this notion as absurd.
But this is not just a guess. When you read these articles, you will see just some of the evidence that leads me to this conclusion. There are a lot of data on this, and most of it comes from statistics issued by various Chinese government agencies. But it is not advertised by the mainland press or TV. So, many Chinese are not at all aware, and think that everything will soon be wonderful, because that is pretty much what they constantly hear from the official media.
That is one thing I noticed immediately about China: there is a constant barrage everywhere you turn—-TV, advertisements, magazines, newspapers, billboards, etc.—-that essentially suggests that everything is wonderful and getting more wonderful all the time, and everybody is just happy, happy, happy, and China is getting better and better and stronger and stronger. I was really struck by this. It was like living in a never-ending infomercial. Maybe some go to China and are not very aware of this, but to me it was like a constant din.
Actually, at least some of this data is readily available on the mainland. But it requires digging. The official news agencies like Xinhua and the People’s Daily just keep repeating the same mindless mantra in endlessly varying ways every day: “Everything is good, there are only a few small little problems, but the Motherland is unstoppable and
In the accompanying presentation, it is easy to see why Bill Gross’ PIMCO is highly bullish on credit of any variety. As the table below demonstrates, taken straight out of the biggest bond fund’s May 2009 presentation “Investing for the Journey and the Destination: What it means across the Capital Structure” PIMCO doesn’t see any overvalued instruments in the credit realm: MBS, IG, EM and HY/Loans all have wonderfully green and positive metrics in the valuation column. As for products, while PIMCO believes that fundamentals, technicals, valuations and policy support are all “positive” exclusively for Mortgage Backed Securities, in essence this is merely window dressing for justifying to investors (and the SEC) that after every 7 am conversation with Tim Geithner, in which the latter tells Bill that he will buy yet another $20-30 billion in MBS that week, that PIMCO will be frontrunning the taxpayers in purchasing a boatload of Fannie 30 Years.
Yet with all the greenery, following the recent collapse in mortgages, and the explosion of the 30 Yr – 10 Yr UST spread, Bill may reconsider changing some of the exuberant optimism. To wit: Mr Gross may want to learn about such credit phenomena as cumulative losses and loss severities: both of which may precipitate some of the greenery into shrinkage. As Zero Hedge pointed out earlier, assuming 10 cent recoveries on upcoming defaults, the extrapolated cumulative losses could be dramatic: up to 50% of HY names may end up in default (of course that is backing into an estimate based on market trading levels of HY12). But even at half this loss level, the case will end up being that 1 out of 4 names will pay at most 2-3 bi annual coupons before payments stop, and the hot potato will have to find the most gullible investor. Of course with over a trillion notional in all possible credit instruments, PIMCO will perpetuate the “all is great” fallacy for as long as possible because as much as it tries, there is simply not a fool with a large enough balance sheet to purchase all of Gross increasingly distressed securities.
At the end of the day it’s still earnings that matter most. As the expectation ratio has shown, the stock market has remained resilient primarily due to the fact that expectations for earnings have become very low and more corporations are outperforming the low hurdles. But a look under the hood has shed some light on the true strength of these earnings. We’ve seen a common trend of late. Companies are missing top line estimates and handily beating bottom line estimates. The two most recent examples of this phenomenon were RIMM and FedEx. 72% of the S&P 500 reported revenues that were lower than the same quarter last year. As corporations shed workers and other costs they’re actually able to outpace their revenue declines with cost cuts. While we’re still seeing very weak revenues figures (which is representative of the weak economic landscape) we’re actually seeing some margin stabilization and subsequently better than expected bottom line growth. This chart from JP Morgan shows the trend at hand:
GDP is expected to climb substantially this quarter. We’re also seeing some stabilization in overall economic productivity. Meanwhile, on the cost side we’re continuing to see very low levels of hiring, low labor costs, low business spending and inventories. Revenues are down just 17% for the overall S&P 500 on a year over year basis, but as you can see in the following two charts spending and inventories have nosedived:
As JP Morgan notes, there is no evidence that this is sustainable or positive for the markets in the long-term though:
Corporate defense of profits and financial standing, that is continuing in the current quarter, is apparently being rewarded in the credit markets. Corporate spreads over Treasuries and corporate bond yields have continued to decline in the past several weeks even as other longer-term market interest rates were rising.
The implications of corporate financial performance for economic growth over the coming year is uncertain. Business will emerge from recession in better financial health than compared to exits from past recessions, and with internal funds running well above capital spending. These conditions might argue for a relatively robust corporate expansion.
But for this to happen, the extreme caution that produced these financial results has to change. And there is no
While most pundits are still grasping at anecdotal “green shoots” to celebrate the beginning of a “recovery,” the hard data just released by the Federal Reserve reveals a continuing collapse of unprecedented dimensions.
First and foremost, the Fed’s numbers demonstrate, beyond a shadow of a doubt, that the credit market meltdown, which struck with full force after the Lehman Brothers failure last September, actually got a lot worse in the first quarter of this year.
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Open Market Paper: Instead of growing as it had in almost every prior quarter in history, it collapsed at the annual rate of $662.5 billion. (See line 2.)
Banks lending: Credit markets [collapsed] at the astonishing pace of $856.4 billion per year, their biggest cutback of all time (line 7).
Nonbank lending: (line 8 ) pulled out at the annual rate of $468 billion, also the worst on record.
Mortgage lenders: (line 9) pulled out for a third straight month. (Their worst on record was in the prior quarter.)
Consumers: (line 10) were shoved out of the market for credit at the annual pace of $90.7 billion, the worst on record.
The ONLY major player still borrowing money in big amounts was the United States Treasury Department (line 3), sopping up $1,442.8 billion of the credit available — and leaving LESS than nothing for the private sector as a whole.
Bottom line: The first quarter brought the greatest credit collapse of all time.
Excluding public sector borrowing (by the Treasury, government agencies, states, and municipalities), private sector credit was reduced at a mindboggling pace of $1,851.2 billion per year!
And even if you include all the government borrowing, the overall
Total Industry Charts (US, Canada and Mexico)
Year over Year Percent Change – 13 Week Rolling Averages
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13-week moving averages are still moving lower, with no apparent end in sight. The first chart shows the one relatively bright spot is coal. I hear the same message about coal from trucker friends.
I travel a number of routes regularly with my job and one site I pass amazes me. It is a local trucking company property. In early summer 2008 there were maybe 100 total trucks and trailers. Today, there is not much room left in a 12 acre area with 100s for trucks and trailers can not guess the number of trailers stacked 3 to 4 high.
I had heard through a trailer dealer that this trucking company solely purchased equipment to move wind energy projects for a number of years and this year canceled all equipment orders.
I also pass by a switchyard for a BNSF line between Seattle and Chicago once a month. The switchyard is a transfer point for the main line to a local. Freight would wait until there was an opening on the local line or an available engine. Prior to July/August 2008 the yard would have various car carriers, containers and other freight along side the coal cars destined for the power plants. Today only the coal cars are parked there. There is no waiting, except for coal.
Truckers larger and small will need to keep their belts tightened into the early part of next year before they can expect to see freight volumes start increasing, according to the latest industry analysis compiled by FTR Associates.
In a conference call with reporters last week, FTR analysts noted that for freight to start recovering, it must "reach a bottom first" and they predicted the bottom will be reached in the third to fourth quarter of this year. That will lead to a recovery in freight volume to begin sometime in the first quarter of 2010.
Depending upon your philosophical bent, this is either good news or another sign that the Apocalypse is near.
The WSJ is reporting that Toyota is slated to take over the title as the number 1 seller of light vehicles in the U.S.
The bankruptcies of General Motors and Chrysler are changing the landscape of the auto industry. The two U.S. companies are shuttering plants, shedding dealers and reducing their product lines.
As a result, Toyota Motor will become the largest seller of light vehicles in the U.S. It has held the top spot globally since last year.
The Japanese auto maker won’t be the only beneficiary of the two companies’ woes. But in terms of status, market clout and bragging rights, Toyota will be the No. 1 winner.
Its share of the North American light-truck and car market probably will rise to around 20% from 18.4%. GM will end up in second place with 13% to 16% — with Ford hot on its tail.
Although Toyota stock doesn’t change hands directly in the U.S., the company’s American depositary shares (TM), which represent them, are listed on the New York Stock Exchange.
And, at a recent price of around $76 — about $30 below their 52-week high — they’re a good bet for long-term investors.
The Journal suggests that the stock might be a good long-term buy. They point out that analysts suggest it could hit $115 and that it hit $137 a couple of years ago. Maybe, but just a caveat. Toyota and others now have the most fearsome of competitors – government owned companies. In the long run that probably means success for the competitors as political decisions trump business common sense. In the short run it could be formidable as the government does whatever is necessary to prove it didn’t make the stupid decision that everyone acknowledges it did.
Not one macroeconomist acknowledges what I believe to be the true cause of the current collapse of effective demand, the extreme skewness of the income distribution and the attendant indebtedness and inability to spend at previous levels of the bottom half or better of the household income distribution. My reference rant on this subject is here. [Read the rant too, it's a good one. - Ilene]
The macroeconomists keep talking about “monetary stimulus” and “fiscal stimulus” as if they’re talking about stepping on the accelerator of a gasoline internal combustion engine. Except that the engine is running on one cylinder, and if they “prime” the engine, all the gasoline is only going to fire on one cylinder, the one that’s getting the gas—in terms of this metaphor, the rich folks at the top of the currently neo-feudal pecking order.
The fiscal and monetary stimuli of the Great Depression failed to make the income distribution more equal, and failed to reduce unemployment to reasonable levels. Most households weren’t participating in the flow of income to a sufficient degree for that to happen.
It’s time for the policymakers to realize that the economy is in the middle of a vast transition from a debt-financed consumption-heavy economy to one that is higher saving and more investment oriented. That’s a big change, one that will take years. Businesses aren’t going to want to invest in capital formation for consumer markets when they won’t know what the prospective returns are until we burn off some of our excess capacity and consumption patterns stabilize, in sum and in composition, in some new configuration.
It took World War II to equalize the American income distribution last time, a frightening thought. I have no idea what it will take this time.
The best macroeconomic policy right now, and the only one we can afford, is to provide honorable workfare to the growing ranks of the unemployed—in part so that they do not become radicalized and alienated from America—and health benefits so that we don’t compound the losses of the current slump with avoidable sickness.
Macroeconomics in toto—the academic work plus the way it has entered policy—is
Another post published today at the Prudent Investor Newsletters blog, "Chart: Global Food Price Inflation," points to a report in The Economist that might help explain the sense of urgency driving at least some of those efforts.
Inflation’s impact is always relative. And it can be seen in food prices across different nations.
"Changes in global food prices are affecting some countries much more than others. Despite a big fall from peaks in 2008, food-price inflation remains high in places such as Kenya and Russia. In China, however, falling international commodity prices have been passed on to consumers faster. The price of food, as measured by its component in China’s consumer-price index, rose by more than 20% in 2007 but fell by 1.9% in 2008 and by a further 1.3% in the past three months alone."
Of course, there are also many factors that gives rise to these disparities, aside from monetary and fiscal policies (taxes, tariffs, subsidies, etc…), there are considerations of the conditions of infrastructure, capital structure, logistics/distribution, markets, arable lands, water, soil fertility, technology, productivity, economic structure and etc.
Our concern is given the present "benign state of inflation", some developing countries have already been experiencing high food prices, what more if inflation gets a deeper traction globally? Could this be an ominous sign of food crisis perhaps?
Most financial experts are aware that the only reason the economy has not yet collapsed entirely, is due to the trillions in governmental safeguards and industrial subsidies. Zero Hedge has written extensively on the topic, and it is nowhere more obvious than here, that virtually the entire financial system is backstopped by explicit and implicit guarantees. And in true pro-cyclical fashion, the expectation for permanent governmental crutches can be best seen in some of the same metrics that in the post-Lehman days markedly went off the charts, most notably the LIBOR rate. From record wides several months ago, LIBOR, which is critical as it is the reference risk rate for trillions in assorted product classes, has collapsed to an unprecedented low. The rate drop has manifested in an inversion of the 1 Yr UST – 1 Yr LIBOR spread, with the latter clearing 100 bps inside of the former: a topic covered in detail previously by reader Gary Jefferey.
James Bianco of Arbor Research has some interesting comments, discussing the immediate future of LIBOR as a true predictor of the interbank lending market, especially in light of the BBA’s decision to expand the 16 bank LIBOR reporting syndicate as even it has realized that market participants have lost faith in the impartiality and objectivity of LIBOR. In a nutshell, Bianco notes that LIBOR indications by TARP vs non-TARP bank demonstrates a notable schism in risk perception: it is odd (actually, not that odd) that this has not changed notably since Zero Hedge discussed this topic five months ago.
The British Bankers’ Association said Thursday it has started to allow banks operating outside London to contribute quotes for its unsecured interbank lending rates in a bid to keep its rates as representative of bank borrowing costs as possible…The change in definition will open up the number of banks to include those that are highly active in the London money markets but deal out of their domestic headquarters. This comes at a time when some banks on the contributing panels have merged and some foreign banks have reduced their overseas
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at email@example.com with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
Day after day after day this 'market' is manipulated and managed by headlines that memory-less machines read and act upon. Today - yet again - at 210am Japan time, Nikkei news decides it is time to print these headlines:
*JAPAN GPIF TO CUT JAPAN DEBT ALLOCATION TO 35%, RAISE DOMESTIC STOCK ALLOCATION TO 25%: NIKKEI
Tim Cook discusses being gay on BusinessWeek. Recent bullying statistics show that gay teens are from 2 to 3 times more likely to commit suicide than others, and almost 30% of completed suicides are related to problems dealing with sexual identity. Perhaps Tim Cook's story will help people accept their differences, whatever they are, and move on to achieve their goals.
Note from dshort: The charts in this commentary have been updated to include the Q3 2014 Advance Estimate.
The chart below is my way to visualize real GDP change since 2007. I've used a stacked column chart to segment the four major components of GDP with a dashed line overlay to show the sum of the four, which is real GDP itself. Here is the latest overview from the Bureau of Labor Statistics:
The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, federal government spending, and state and local government spending that were partly offset by a negative contribution from private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased.
Bulls showed renewed backbone last week and drew a line in the sand for the bears, buying with gusto into weakness as I suggested they would. After all, this was the buying opportunity they had been waiting for. As if on cue, the start of the World Series launched the rapid market reversal and recovery. However, there is little chance that the rally will go straight up. Volatility is back, and I would look for prices to consolidate at this level before making an attempt to go higher. I still question whether the S&P 500 will ultimately achieve a new high before year end.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then o...
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If you're following Valeant's proposed takeover (or merger) of Allergan and the lawsuit by Allergan against Valeant and notorious hedge fund manager William Ackman, for insider trading this is a must-read article.
Linette Lopez describes the roles played by key Wall Street hedge fund owners--Jim Chanos, John Paulson, and Mason Morfit, a major shareholder in Valeant. Linette goes through the con...
There is lots of action in Southwest Airlines Co. November expiry call options today ahead of the air carrier’s third-quarter earnings report prior to the opening bell on Thursday. Among the large block trades initiated throughout the trading session, there appears to be at least one options market participant establishing a call spread in far out of the money options. It looks like the trader purchased a 4,000-lot Nov 37/39 call spread at a net premium of $0.40 apiece. The trade makes money if shares in Southwest rally 9.0% over the current price of $34.32 to exceed the effective breakeven point at $37.40, with maximum potential profits of $1.60 per contract available in the event that shares jump more than 13% to $39.00 by expiration. In September, the stock tou...
Now that bitcoin has subsided from speculative bubble to functioning currency (see the price chart below), it’s safe for non-speculators to explore the whole “cryptocurrency” thing. So…is bitcoin or one of its growing list of competitors a useful addition to the average person’s array of bank accounts and credit cards — or is it a replacement for most of those things? And how does one make this transition?
With his usual excellent timing, London-based financial writer/actor/stand-up comic Dominic Frisby has just released Bitcoin: The Future of Money? in which he explains all this in terms most readers will have no tr...
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Well PSW Subscribers....I am still here, barely. From my last post a few months ago to now, nothing has changed much, but there are a few bargins out there that as investors, should be put on the watch list (again) and if so desired....buy a small amount.
First, the media is on a tear against biotechs/pharma, ripping companies for their drug prices. Gilead's HepC drug, Sovaldi, is priced at $84K for the 12-week treatment. Pundits were screaming bloody murder that it was a total rip off, but when one investigates the other drugs out there, and the consequences of not taking Sovaldi vs. another drug combinations, then things become clearer. For instance, Olysio (JNJ) is about $66,000 for a 12-week treatment, but is approved for fewer types of patients AND...
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